Starting from January 2015, Indonesian tobacco products are subject to an average tax rise of 8.7 percent. The excise tax on machine-rolled cigarettes becomes IDR 355 (USD $0.03) and on hand-rolled cigarettes IDR 290 (USD $0.02) per stick. The tax hike is implemented by the government in a move to increase state income through tax revenues. The higher excise tax is expected to have a minor effect on tobacco sales in Indonesia as retail prices for cigarettes remain among the lowest in the Southeast Asian region.
The tax increase will apply to all tobacco-related manufactured products in Indonesia, a country where approximately 65 percent of Indonesian men consume tobacco products (which is between 80 and 85 million people in absolute terms). There are an estimated 500,000 Indonesian farmers who earn a living by growing tobacco, while there are almost seven million people employed directly or indirectly in the country’s cigarette industry. The smaller excise increase for mass-produced, hand-rolled clove cigarettes (kretek) is conducted in consideration of the large number of Indonesians employed in that segment. A larger increase would jeopardize employment in this sector, particularly as Indonesian smokers increasingly shift to machine-rolled cigarettes. This shift led to the closing of two hand-rolled cigarette factories operated by HM Sampoerna (Indonesia’s largest cigarette producer) in May 2014 in East Java.
Indonesia is an important tobacco-products manufacturer as raw materials are mostly sourced domestically and - in combination with cheap labor costs - production costs of cigarettes are low. However, the industry is facing difficulties due to improved (global) awareness of its health effects as well as higher domestic taxes. In July 2014, the Susilo Bambang Yudhoyono administration implemented a new regulation that forced tobacco producers to place graphic warnings on cigarette packages in an effort to discourage smoking in Indonesia.
However, Indonesia is one of the few countries that has not ratified the Framework Convention on Tobacco Control (FCTC) of the World Health Organization (WHO). This treaty aims “to protect present and future generations from the devastating health, social, environmental and economic consequences of tobacco consumption and exposure to tobacco smoke" through a set of universal standards stating the dangers of tobacco and limiting its use worldwide. The treaty's provisions include rules that govern the production, sale, distribution, advertisement, and taxation of tobacco.
The Indonesian government targets state revenue of IDR 120.5 trillion (about USD $9.7 billion) from cigarette excises in 2015, up 9.1 percent from the target of IDR 111 trillion (USD $9.0 billion) in 2014. The Indonesian excise tax law sets the maximum level of excise taxes on tobacco products at 275 percent of tobacco factory prices or 57 percent of retail prices.